Landesbank sues Aladdin over synthetic CDO, reports Reuters

Reuters reports that Bayerische Landesbank has launched a lawsuit in a New York district court against Aladdin Capital over a synthetic CDO. The German bank is seeking to recover $60 million, alleging that Aladdin managed the portfolio negligently, according to the article.

Although there have been a number of recent lawsuits relating to synthetic CDOs, this one is unusual in that it is the manager that is being sued. Furthermore, the reference portfolio in this 2007 deal, Aladdin Synthetic CDO II, which was arranged by Goldman Sachs, is entirely corporate.

According to Reuters, the 100 name portfolio has suffered 11 credit events. The FT’s Alphaville column adds that Aladdin’s portfolio substitutions made the original reference portfolio considerably worse. It says that the original portfolio included only one Icelandic bank, but that Aladdin switched into the other two Icelandic banks in early 2008. More than half of all the credit events in the portfolio were on names that the manager had added since the start of the deal.

A relatively unusual feature of this CSO was its ability to take short positions. However, according to the complaint (see 2011-02-01 Bayerische Landesbank complaint (PDF, 241.0 kb) the manager failed to make any use of a feature which Bayerische Landesbank says could have compensated for some of the defaults in the portfolio.

Bayerische Landesbank lost all its $60 million investment in the deal, with both the class B1 notes (originally rated AA by Standard & Poor’s) and the S&P A rated class C1 notes both wiped out. See details of the original offering circular (2011-02-01 Aladdin Synthetic CDO II OM (PDF, 940.6 kb).